Blockchain 102

BitCoin is currenty running at the threshold of its ability to keep up with users’ transactions, and there are two competing proposals for addressing how this can be fixed.  (If you don’t know the background, read my previous post.)

One option has been proposed by the BitCoin core development team.  It involves striping some information out of each BitCoin transaction and storing it “off chain” – this will result in a smaller transaction footprint in each block, and therefore more capacity for transactions within the current block size.  The proposal also allows for larger blocks, and the potential to add “secondary chains”.  This proposal is called “Segregated Witness”, or SegWit.

The second option is supported mainly by the BitCoin miners, and involves increasing the size of the blocks (to allow more transactions) and also the capability for miners to increase the block size and transaction fees in the future.  Ths option is called “BitCoin Unlimited”, or BU.  This option is not supported by many stakeholders because they see this as granting too much control to the miners, and reducing the “democratic” and decentralized nature of BitCoin.

One wrinkle is that a number of the large miners have developed a (panted) optimization in the block hash calculation (the so called “proof of work”) that gives them about a 20% advantage in computing new blocks for the Blockchain.  BU will entrench this competitive advantage, but SegWit includes some provisions to neutralize it.

(As an aside, other cryto-currencies and blockchain-based technologies, such as Ethereum (more about this in a future blog post), are selecting alternate algorithms for “proof of work” to try to avoid some of the centralization that has occurred in the BitCoin network.  But more about this in a future post.)

This drama is exploding all over the Internet, sub-Reddits and discussion boards everywhere.  But it is illustrative of the nature of the BitCoin network.

Both options have been implemented and made available to BitCoin miners and nodes, and the stakeholders can implement either option and “vote” as to their preference for the future of the BitCoin network.  Some of the lager miners have threatened to unilaterally implement BU and force the rest of the network to get in line.  However the BitCoin network works based on the concept of “consensus”, and if there is no consensus, then the network won’t operate.  If the nodes don’t accept blocks created by the miners, the new blocks won’t get distributed and they won’t be part of the common Blockchain ledger.  At worst the network will “split” and there will be 2 separate BitCoins.

What does the future hold for BitCoin?